ARMOUR GROUP PLC ( Armour or the "Group") Preliminary Results for the year ended 31 August 2008

Transcription

1 FINANCIAL HEADLINES ( Armour or the "Group") Preliminary Results for the year ended Sales 54.0 million (: 55.2 million) EBITDA* of 5.2 million (: 6.5 million). Profit before taxation 3.5 million (: 4.5 million) Basic earnings per ordinary share 3.7p (: 4.8p). Cash generated from operations of 3.1 million ( : 5.9 million). Recommended dividend of 0.65p ( : 0.65p) per ordinary share. * EBITDA is defined as profit before interest, taxation, depreciation, amortisation and share-based payments. BUSINESS HIGHLIGHTS New exclusive distribution agreements for Clifford, Viper, Hornet and Orion (car security and audio brands), Roth Audio, Aquavision bathroom televisions, Soundcast wireless audio streaming systems and Epson projectors for the home entertainment market. Investment in new facilities in Manchester providing over 100,000 sq. ft. of manufacturing, warehousing, showroom and offices. This first class operating facility will allow for expansion, enhanced showcasing of Group products and increased levels of service to our customers. New products launched during the year include io (in-car Bluetooth music streaming and handsfree solutions), Viewsmart (proprietary range of brackets, cables and audio-visual accessories) and additions and enhancements to the Autoleads, Alphason, QED, Q Acoustics, Audica, Myryad and NAD product ranges. Business awards from the trade and consumer press and numerous product awards and recommendations, won over the past year, recognise the Group operations leading positions in their respective markets. George Dexter, Chief Executive of Armour Group plc commented: The strong trading environment of the first six months gave way to challenging trading conditions in the second half of the year. Despite these deteriorating economic circumstances the Group has delivered a satisfactory set of results. Strategically, our business model remains unchanged and is based upon strong recognised brands, a quality product portfolio, unrivalled distribution into the UK s consumer electronics market, a structured programme of product innovation and first class customer service. We have made good progress building on all these elements over the past year and will continue to pursue these strategic goals. These are undoubtedly challenging times for all businesses, from which we are not immune. However, our business model and strategy gives the Group a strong foundation to weather the current economic downturn and be well prepared to return to growth when our markets recover. For further information please contact: Armour Group plc Tel: George Dexter, Chief Executive John Harris, Finance Director FinnCap, Nominated Adviser and Broker Tel: Geoff Nash, Corporate Finance Director Threadneedle Communications, Financial PR Tel: Trevor Bass, Alex White

2 ABOUT ARMOUR Armour Group is the United Kingdom s leading consumer electronics group within the home and in-car communication and entertainment markets, committed to designing, manufacturing and distributing leading-edge audio and visual products and solutions. Armour Group has two principle operating divisions, Armour Home and Armour Auto, and employs over 330 people across eight operating sites in the UK, Sweden and Hong Kong. The Group possesses a strong brand portfolio, including more than 4,000 products and accessories, which is underpinned by innovative product development and investment in proprietary technology. An unrivalled distribution capability ensures that products are supplied direct to more than 6,000 retail outlets within the UK and to customers in 65 countries worldwide. Armour Group is also a leading supplier of audio and visual technology to a host of non-retail customers including vehicle manufacturers, hotel chains, house builders and custom installers. The Group s strength is based on 5 fundamentals: Strong recognised brands Quality product portfolio Unrivalled distribution into the UK s electronics market Structured programme of product innovation First class customer service Armour Home Armour Home is the leading provider of high-end, products, solutions and services to the hi-fi, home theatre and entertainment market within the UK. Armour Home boasts a diverse mix of more than 1,700 products that span all aspects of vision, sound and the living experience within home entertainment. This wide-ranging portfolio includes brands that are at the forefront of the hi-fi and audio-visual sectors, with the recognised industry leaders QED cable interconnects, Systemline multi-room entertainment systems and Alphason furniture solutions. A mix of eleven owned brands and twelve distributed brands are supplied to more than 2,500 customers, 4,000 retail outlets and 150 international partners across 70 markets. Within the UK, customers include Sevenoaks Sound and Vision, Audio T, Comet, Argos, Tesco, Selfridges, Harrods, Asda and Marks & Spencer. The Division has two operating companies Armour Home Electronics and Alphason Designs. Armour Auto Armour Auto is the UK and Sweden s market leader in the supply of audio and video products and accessories for the in-car entertainment and communications market. Armour Auto s portfolio of 9 specialist brands, 5 of which are owned, offer in excess of 2,500 products that are supplied to over 1,500 customers across a wide range of market sectors including the retail aftermarket, original equipment manufacturers (OEM), leisure, commercial vehicles, car dealerships and agriculture. Brands include Autoleads, acknowledged as being the industry standard for in-vehicle connectivity solutions; Radiomobile, the longest established aftermarket car stereo marque in the UK; io, Armour Auto s new brand of incar Bluetooth music streaming and handsfree solutions; and Clifford, the UK s market leading Thatcham approved vehicle security brand. Armour Auto s customers include Halfords, Carphone Warehouse, Motorworld, BMW, Bentley, Hyundai, Scania Trucks, Claas, Case New Holland Tractors and over 1,500 independent specialist automotive retailers across the UK and Ireland.

3 CHAIRMAN'S STATEMENT The Group results for the year to reflect the significant changes that have taken place in the economy as a whole and, in particular, our core trading markets. Group sales were down by 2% to 54.0 million ( : 55.2 million) and profit from operations declined by 23% to 4.0 million ( : 5.2 million). Basic underlying earnings per ordinary share are 3.9p, a reduction of 20% and the full year dividend is maintained at 0.65p per ordinary share. The Group s strong first half results were followed by a weaker trading performance in the second half of the financial year, brought about by the deteriorating economic climate and falling levels of consumer confidence. Both operating divisions have been impacted by the slowing economy in the second half of the year, although this has been more pronounced in the automotive division. Nonetheless, the Group has delivered a credible overall performance against an increasingly difficult economic backdrop. We offer our customers a comprehensive range of quality brands and products in our core areas of focus and further differentiate ourselves from our competitors by service excellence. We are the United Kingdom market leader in the supply of distributed audio and video multi-room entertainment systems and audio-visual furniture, have the United Kingdom s leading brand of hi-fi interconnects and are the leading accessory supplier to the incar entertainment aftermarket. Our market leading position in both the home and automotive sectors is underlined by the 26 awards presented over the past year by the trade and consumer press to our operating divisions. These included best business awards for Alphason Designs Limited ( Alphason ) and Armour Auto as well as a host of product awards and recommendations across many of the Group s brands. As part of our strategy to offer quality products and recognised brands, we continue to look for partners who have complementary brands and products, which can be successfully distributed through our channels to market. In July, we were pleased to announce the agreement with Directed Electronics appointing Armour Auto as its exclusive distributor for its automotive brands in the United Kingdom, Sweden and Republic of Ireland. This distribution agreement was one of a number of such agreements signed in the year. Currently, third party brands, which are typically distributed on an exclusive basis, account for 23% of the Group s sales. We continue to invest in the Group s operations, infrastructure, new product development and sales and marketing. This investment is central to our strategy and will support the Group s sales in the medium term by providing innovative products and infrastructure to deliver a first class service to our customers. The largest single investment in the year has been the relocation of Alphason onto a single site in Wigan, which provides over 100,000 sq. ft. of manufacturing, warehousing, showroom and offices. This first class operating facility allows for expansion and increased levels of service to our customers. The Group now employs over 330 people in the United Kingdom, Ireland, Sweden and Hong Kong. It is thanks to their hard work, dedication and professionalism that the Group continues its development even in these more testing times. I would like to acknowledge the Board s appreciation of their commitment and effort over the course of the year. The wider economic outlook for the next year is one of uncertainty, presenting challenges that will affect both businesses and households alike. The Group has a broad portfolio of strong brands, customers and products and a business model and strategy that the Board believes will deliver sustainable long-term growth. The current economic volatility and period of weak consumer demand are cyclical events, which will stabilise and recover in due course. Whilst we are aware of the current economic weakness and are taking appropriate steps to minimise its impact, pursuit of our strategic goals will continue such that the Group is in a position of strength when the economy recovers. BOB MORTON Chairman 19 November

4 CONSOLIDATED INCOME STATEMENT For the year ended Note Revenue 2 54,008 55,171 Changes in inventory of finished goods and work in progress 2,870 1,609 Raw materials and consumables (31,272) (30,038) Employee benefits costs (9,631) (9,516) Depreciation and amortisation expense (1,075) (1,178) Other expenses (10,871) (10,805) Total expenses (49,979) (49,928) Profit from operations 4,029 5,243 Finance expense (703) (765) Finance income Share of (loss)/profit of associated undertakings (7) 3 Profit before taxation 2 3,485 4,503 Taxation expense 3 (991) (1,262) Profit from continuing operations 2,494 3,241 Post taxation loss on disposal of discontinued operations 4 - (2,979) Profit for the year 2, Earnings/(loss) per ordinary share 5 From continuing and discontinued operations Basic 3.7p 0.4p Diluted 3.7p 0.4p From continuing operations Basic 3.7p 4.8p Diluted 3.7p 4.7p From discontinued operations Basic Diluted - (4.4)p - (4.3)p

5 CONSOLIDATED BALANCE SHEET At Note Non-current assets Goodwill 21,082 21,082 Other intangible assets 2, Property, plant and equipment 2,102 1,604 Investment in associated undertakings Total non-current assets 25,593 24,052 Current assets Inventories 12,826 10,490 Trade and other receivables 10,220 11,430 Cash and cash equivalents Total current assets 23,216 22,812 Total assets 2 48,809 46,864 Current liabilities Bank overdrafts and borrowings (6,650) (714) Trade and other payables (9,755) (14,664) Corporation taxation liability (326) (1,146) Provisions (136) (296) Total current liabilities (16,867) (16,820) Non-current liabilities Borrowings (2,394) (3,082) Provisions (226) - Deferred taxation liability (520) (18) Total non-current liabilities (3,140) (3,100) Total liabilities 2 (20,007) (19,920) Total net assets 2 28,802 26,944 Equity Share capital 6,848 6,848 Share premium 8,513 8,513 Other reserves Retained earnings 13,074 10,919 Translation reserve 68 (7) Share trust reserve (572) (200) Total equity 28,802 26,944

6 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY For the years ended Share Share Other Retained Translation Share trust Total capital premium reserves earnings reserve reserve equity At 1 September ,841 8, ,907 - (200) 26,915 Profit for the year Currency translation (7) - (7) (7) Options exercised Share-based payments Dividend paid (371) - - (371) At 6,848 8, ,919 (7) (200) 26,944 Profit for the year , ,494 Currency translation , ,569 Shares acquired by share (372) (372) trust Share-based payments Dividend paid (439) - - (439) At 6,848 8, , (572) 28,802

7 CONSOLIDATED CASH FLOW STATEMENT For the year ended Note Cash flow from operating activities Cash generated from operations 7 3,124 5,892 Income taxes paid (1,308) (919) Net cash from operating activities 1,816 4,973 Investing activities Acquisition of subsidiary undertaking, net of cash acquired (4,302) (155) Disposal of subsidiary undertaking, net of cash disposed Purchase of property, plant and equipment (1,196) (718) Sale of property, plant and equipment Expenditure on intangible assets (1,506) (646) Invested in associated undertakings - (372) Interest received Net cash used in investing activities (6,291) (1,785) Financing activities Proceeds on issue of shares - 24 Dividend paid (439) (371) Repayment of bank loans (720) (720) Repayment of finance lease creditors (26) (44) Shares acquired by share trust (372) - Interest paid (726) (511) Net cash used in financing activities (2,283) (1,622) Net (decrease)/increase in cash, cash equivalents and bank overdrafts 8 (6,758) 1,566 Currency variations on cash, cash equivalents and bank overdrafts 74 (8) Cash, cash equivalents and bank overdrafts at the start of the year 892 (666) Cash, cash equivalents and bank overdrafts at the end of the year (5,792) 892

8 ended 1. Accounting Policies Basis of preparation The principal accounting policies adopted in the preparation of this preliminary announcement are unchanged from those disclosed in the interim announcement published on 14 April. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ( IFRS ), this announcement does not itself contain sufficient information to comply with IFRS. The Group expects to publish full financial statements that comply with IFRS in December. This is the first time that the Group has prepared its preliminary announcement in accordance with Adopted IFRS, having previously prepared its preliminary announcement in accordance with UK accounting standards. The date of transition to IFRS is 1 September Details of how the transition from UK accounting standards to Adopted IFRS has affected the Group s reported financial position, financial performance and cash flows are given in Note Segment Information The Group operates in the following main business segments: Armour Auto: Armour Home: Central operations: The design, manufacture and supply of products for the in-car communications and entertainment market. The design, manufacture and supply of products into the hi-fi, home theatre and home entertainment markets. The provision of finance and support services, including future product concepts and quality control based in Hong Kong, to the other business segments within the Group. The Group s primary reporting format for reporting segment information is business segments. Year ended Armour Auto Armour Home Central operations Total Revenue 14,409 39,599-54,008 Profit/(loss) before taxation 1,284 4,872 (2,671) 3,485 Balance Sheet Assets 8,557 18,650 21,602 48,809 Liabilities (2,281) (6,538) (11,188) (20,007) Net Assets 6,276 12,112 10,414 28,802 Other Capital expenditure (210) (973) (13) (1,196) Depreciation Amortisation of intangible assets

9 ended 2. Segment Information (continued) Year ended Armour Auto Armour Home Central operations Total Revenue 17,290 37,881-55,171 Profit/(loss) before taxation 2,158 4,600 (2,255) 4,503 Balance Sheet Assets 9,709 16,008 21,147 46,864 Liabilities (3,267) (7,335) (9,318) (19,920) Net Assets 6,442 8,673 11,829 26,944 Other Capital expenditure (286) (325) (39) (650) Depreciation Amortisation of intangible assets The Group s secondary reporting format for reporting segment information is geographic segments. Revenue by location of customers Total assets by location of assets Capital expenditure by location of assets United Kingdom 45,855 46,930 28,349 26,593 (1,185) (636) Rest of Europe 6,346 6, (8) (3) Rest of world 1,807 1,617 7 (6) (3) (11) 54,008 55,171 28,802 26,944 (1,196) (650) 3. Taxation Expense Current taxation expense UK Corporation Tax on profit for the year (478) (1,211) Adjustment in respect of prior years Income tax of overseas operations (47) (38) Total current taxation expense (489) (1,239) Deferred taxation expense UK operations (544) (12) Adjustment in respect of prior years 62 - Overseas operations (20) (11) Total deferred taxation expense (502) (23) Total taxation expense (991) (1,262)

10 ended 3. Taxation Expense (continued) The current taxation assessed for the year is lower ( : Lower) than the standard rate of UK Corporation Tax. The differences are explained below: Profit on ordinary activities before taxation 3,485 4,503 Profit multiplied by the rate of UK corporation tax of 29.17% (: 30%) (1,017) (1,351) Effects of: Expenses not deductible for taxation purposes (166) (146) Taxation credits (Research and Development and options relief) Recognition of losses carried forward 11 - Use of previously unrecognised losses Lower taxation rates on overseas profit and marginal relief 10 3 Corporate and deferred taxation rate differences 13 (6) Adjustments in respect of prior years Total taxation expense (991) (1,262) The current year rate of UK Corporation Tax is shown as 29.17% reflecting the rate change from 30% to 28% effective from April. 4. Discontinued Operations In August, the Group sold the entire ordinary share capital of Armour Custom Services Limited and The Hi- End Limited. The loss on disposal has been calculated as follows: Non-current assets 463 Inventories 547 Trade and other receivables 600 Trade and other payables (183) 1,427 Sale proceeds 400 Cost of sale (30) Provision for onerous lease (120) 250 Loss before goodwill (1,177) Goodwill written off (1,625) Loss after taxation for the year (177) Loss on disposal (2,979) The trading result for the year ended of the discontinued operations is shown below: Revenue 2,185 Expenses (2,454) Loss before taxation (269) Taxation 92 Loss after taxation for the year (177)

11 ended 5. Earnings per Ordinary Share Basic earnings per ordinary share are calculated using the weighted average number of ordinary shares in issue during the financial year of 67,191,706 ( : 67,493,840). Diluted earnings per ordinary share is calculated with reference to 68,044,400 ( : 68,831,976) ordinary shares. The effect of the exercise of options on the weighted average number of ordinary shares in issue is 852,694 ( : 1,338,136). At, the Armour Employees Share Trust held 3,424,000 ( : 966,000) ordinary shares. The weighted average number of ordinary shares held by the Armour Employees Share Trust during the year of 1,288,361 ( : 966,000) are not included in either the weighted average, or diluted weighted average, ordinary shares in issue during the financial year. Underlying earnings per ordinary share are also shown calculated by reference to earnings before share-based payments. The Directors consider that this gives a useful additional indication of underlying performance. It should be noted that the term underlying is not defined under IFRS and may not therefore be comparable with similarly titled profit measures reported by other entities. Basic Diluted Basic p p p Diluted p Total operations Profit for the financial period 2, Share-based payments Underlying earnings 2, Continuing operations Profit from continuing operations 2, , Share-based payments Underlying earnings 2, , Dividend Proposed dividend for the year of 0.65p ( : 0.65p) per ordinary share (423) (439) The Board is recommending an unchanged dividend for the year of 0.65 pence per ordinary share. The proposed dividend for the year has not been accrued in the Consolidated Balance Sheet as at. The dividend proposed in the financial statements as at, and approved by shareholders at the Annual General Meeting held on 11 December, was charged to reserves and paid during the year.

12 ended 7. Net Cash Inflow from Operations Twelve months to Twelve months to Profit from operations 4,029 5,243 Loss from trading of discontinued operations - (269) Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payments (Gain)/loss on sale of property, plant and equipment (68) 9 Movements before working capital 5,136 6,372 Increase in inventories (2,335) (1,201) Decrease/(increase) in trade and other receivables 810 (1,926) (Decrease)/increase in trade, other payables and provisions (487) 2,647 Net cash from operations 3,124 5, Reconciliation of Net Cash Flow to Movement in Net Debt Net debt incorporates the Group s borrowings, bank overdrafts and obligations under finance leases, less cash and cash equivalents. A reconciliation of the movement in the net debt from the beginning to the end of the year is shown below: Twelve months to Twelve months to Net (decrease)/increase in cash and cash equivalents (6,758) 1,566 Net cash outflow from debt and lease financing Other non-cash movements 42 (43) (Increase)/decrease in net debt (5,970) 2,287 Opening net debt (2,904) (5,191) Closing net debt (8,874) (2,904) 9. Publication of non-statutory accounts The financial information set out in this preliminary announcement does not constitute the Group s financial statements for the year ended and the year ended. The financial statements for the year ended were prepared in accordance with applicable UK Generally Accepted Accounting Practice and have been delivered to the Registrar of Companies. Details of the affect on those financial statements having subsequently adopted IFRS are given in note 11 to this preliminary announcement. The financial statements for the year ended will be delivered to the Registrar of Companies following the Company s Annual General Meeting. The auditors report on both accounts was unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain statements under sections 237(2) or (3) of the Companies Act The full audited financial statements of Armour Group plc for the period ended are expected to be posted to shareholders no later than 22 December and will be available to the public at the Company s registered office, Lonsdale House, 7-9 Lonsdale Gardens, Tunbridge Wells Kent, TN1 1NU and available to view on the Company s website at from that date. 10. Annual General Meeting The Annual General Meeting will be held at the offices of Arnold & Porter (UK) LLP, Tower 42, 25 Old Broad Street, London, EC2N 1HQ on 29 January 2009.

13 ended 11. First time adoption of IFRS Reconciliations and explanatory notes on how the transition to IFRS has affected profit and net assets previously reported under UK GAAP are given below: Profit and Loss Account Reconciliation for the Year Ended. UK GAAP Transition adjustments IFRS Revenue Continuing operations 55,171-55,171 Discontinued operations 2,185 (2,185) - 57,356 (2,185) 55,171 Profit from operations Continuing operations 4,118 1,125 5,243 Discontinued operations (360) 360-3,758 1,485 5,243 Share of (loss)/profit of associated undertakings (15) 18 3 Finance income Finance costs (765) - (765) Profit before taxation 3,000 1,503 4,503 Taxation expense (1,155) (107) (1,262) 1,845 1,396 3,241 Discontinued operations (2,711) (268) (2,979) (Loss)/profit for the financial year (866) 1, Summary of adjustments Sub-note Reversal of amortisation of goodwill a 1,168 Development costs capitalised in the financial year c 539 Amortisation and amounts written off capitalised development costs c (484) Losses recognised on derivatives e (58) Restatement of lease rental incentives f (40) Restatement of associated undertakings g 18 Deferred taxation adjustment h (15) Total of adjustments 1,128 The trading result of discontinued operations, being a post taxation loss of 268,000 (inclusive of amortisation of goodwill of 91,000), has been reclassified within the single income statement heading of Discontinued operations.

14 ended 11. First time adoption of IFRS (continued) Consolidated Balance Sheet Reconciliation at 1 September Subnote UK GAAP Transition adjustments IFRS Non-current assets Goodwill a 23,338-23,338 Other intangible assets b, c Property, plant and equipment b 2,256 (151) 2,105 Deferred taxation assets h, i 291 (291) - Total non-current assets 25, ,393 Current assets Inventories 9,836-9,836 Trade and other receivables 9,702-9,702 Cash and cash equivalents Total current assets 19,724-19,724 Total assets 45, ,117 Current liabilities Bank overdrafts and borrowings (1,610) - (1,610) Trade and other payables e, f, i (12,631) (8) (12,639) Corporation taxation liability (916) - (916) Provisions i - (140) (140) Total current liabilities (15,157) (148) (15,305) Non-current liabilities Borrowings (3,767) - (3,767) Deferred consideration (127) - (127) Deferred taxation liability h, i - (3) (3) Total non-current liabilities (3,894) (3) (3,897) Total liabilities (19,051) (151) (19,202) Total net assets 26, ,915 Equity Share capital 6,841-6,841 Share premium 8,496-8,496 Other reserves Retained earnings 10, ,907 Share trust reserve (200) - (200) Total equity 26, ,915

15 ended 11. First time adoption of IFRS (continued) Consolidated Balance Sheet Reconciliation at. Subnote UK GAAP Transition adjustments IFRS Non-current assets Goodwill a 19,914 1,168 21,082 Other intangible assets b, c Property, plant and equipment b 1,741 (137) 1,604 Investment in associated undertakings g Deferred taxation assets h, i 291 (291) - Total non-current assets 22,303 1,749 24,052 Current assets Inventories 10,490-10,490 Trade and other receivables 11,430-11,430 Cash and cash equivalents Total current assets 22,812-22,812 Total assets 45,115 1,749 46,864 Current liabilities Bank overdrafts and borrowings (714) - (714) Trade and other payables e, f, i (14,714) 50 (14,664) Corporation taxation liability (1,146) - (1,146) Provisions i - (296) (296) Total current liabilities (16,574) (246) (16,820) Non-current liabilities Borrowings (3,082) - (3,082) Deferred taxation liability h, i - (18) (18) Total non-current liabilities (3,082) (18) (3,100) Total liabilities (19,656) (264) (19,920) Total net assets 25,459 1,485 26,944 Equity Share capital 6,848-6,848 Share premium 8,513-8,513 Other reserves Retained earnings 9,427 1,492 10,919 Translation reserve d - (7) (7) Share trust reserve (200) - (200) Total equity 25,459 1,485 26,944

16 ended 11. First time adoption of IFRS (continued) Explanations of the adjustments made to the UK GAAP Profit and Loss Account and Consolidated Balance Sheets are as follows: (a) Goodwill Under IFRS 3, goodwill is not amortised but instead is subject to an annual impairment review. An adjustment has been made to remove the goodwill amortisation charge made under UK GAAP. Under the transition rules, no adjustment need be made to the carrying value of goodwill at the date of transition. (b) Software Costs Under UK GAAP, software is considered to be part of the operating system of the computer systems used by the Group and is capitalised within plant and equipment. Under IAS 38, this software should be separately identified as an intangible asset. The net book value of these assets at was 137,000 (1 September 2006: 151,000). (c) Product Development Expenditure Under UK GAAP, the Group s accounting policy was to expense all development expenditure when incurred. In accordance with IAS 38, costs incurred on product development are capitalised as an intangible asset where the asset created can be identified, its cost measured reliably and it is probable that the asset will generate future economic benefits. Capitalised development expenditure is amortised over its expected useful life. (d) Translation Reserve Under IAS 21, foreign exchange differences arising from the translation of opening net assets, must be included in a separate translation reserve rather than being included in retained profit. The Group has elected not to revisit currency translation reserve movements prior to the date of transition. Accordingly, at the date of transition, the translation reserve balance was zero. Only cumulative translation differences arising after the date of transition in respect of overseas subsidiary undertakings will be recycled to the income statement on disposal of these subsidiaries. (e) Forward foreign currency contracts The Group makes use of foreign currency derivatives (forward foreign currency contracts) to protect its position on the purchase of inventories. Under UK GAAP, foreign currency derivatives were held off balance sheet. Under IAS 32 and IAS 39, derivative contracts are valued ( marked to market ) at the balance sheet date and any resulting gains or losses are taken to the income statement. (f) Lease Incentives In accordance with IAS 17: Leases and SIC 15: Operating Leases Incentives, adjustments have been made to recognise the benefit of lease incentives over the full lease term rather than to the date of the first rent review. (g) Share of Profit/Losses in Associated Undertakings Under UK GAAP, the premium on acquisition of the investment was amortised to nil in equal annual instalments over its estimated useful life of 20 years. Under IFRS, the premium is not amortised but instead is subject to an annual impairment review. An adjustment has been made to remove the amortisation charge made under UK GAAP. (h) Deferred Taxation Adoption of IFRS has caused adjustment to the value of deferred taxation assets and liabilities. The most significant adjustment has been caused by the recognition of product development expenditure as an asset, thereby creating a deferred taxation liability. (i) Balance sheet Reclassifications To comply with IFRS 1, various amounts such as provisions and deferred taxation have been reclassified.